Rathbun: The ‘lie’ in LIBOR

In recent weeks there have been many articles written about the major banks in the world manipulating the London Inter Bank Offered Rate or LIBOR. My first thought was people are actually surprised that the big banks are manipulating interest rates! Big banks, really? They wouldn’t do that to us, right? Wrong.

The truth is things have been manipulated in the financial market for a long time and they will continue to be manipulated in the future and there is virtually nothing that you or I can do about it. Oh sure, they will say we are sorry for screwing you and they’ll promise to not do it again. And to make you feel better, they’ll pay a big fine, without admitting any guilt or personal liability to the organization that was supposed to be overseeing the banks in the first place.

More than $800 trillion in financial instruments worldwide are pegged to or affected by the LIBOR. This is more than 10 times the total world economy. Everything from your credit card rates to your home mortgage is affected by this rate of interest. While the daily rate change is miniscule, the overall affect of one basis point could mean billions of dollars to those doing the manipulating.

One bank could overstate its daily rate enough to change the overall average and thereby make a large amount of money by having bet that the rate would change. The bank makes the bet and then rigs the numbers so the rate becomes the other side of the bet and they win.

So we know what they did and how they did it; what do we do now? Not really much you can do other than knowing that the game is rigged and figure out how to minimize the damage to yourself.

The first thing of course is not to borrow money unless you have to. Paying off your credit cards each month and not paying any interest makes the interest rate a moot point. Having a fixed rate mortgage makes the fluctuations in the market rate a nonevent for you. Most people don’t get involved in credit default swaps or other derivatives that are manipulated by these institutions.

Finally, the most important thing is don’t do business with any of these financial giants unless there is absolutely no other choice. Likewise, don’t purchase the stock or bonds that they issue either. If they want to manipulate the market that they play in and benefit from the manipulation then make them be the only ones on each side of the bet.

One of the things to be very cautious of now is the LIBOR replacement. Currently, the front-runner is the GCF Repo Index. This is the General Collateral Financing Trades Index. These are repurchase agreements executed on a blind broker basis through the Government Securities Clearing Corporation. According to Investopedia.com this method of trading allows dealers and agents to trade government-issued fixed-income securities on a term and rate basis, rather than waiting for settlement on a trade-by-trade basis.

This allows faster transaction times and greater trading mobility. No way any of this can be manipulated, right? Right …

This scandal is so large that it could and probably will further undermine our financial system and further discourage people from investing in capital markets altogether. Not a good thing.

I think some of the more revealing information from this is that some of our own financial institutions knew about this and didn’t say anything for fear of reprisal or for fear of cutting into their profits from participating in the fraud.

It is scandals such as this that create an attitude of isolation and powerlessness among the average investor and business owner. None of us are powerful and corrupt enough to play in that game and/or to fix it. The only thing we can do, as noted above, is simply refuse to participate.

This is the highest level of crony capitalism there is; it is no wonder that people get discouraged and have a low opinion of free market capitalism. Couple this scandal with a lack of understanding of how capitalism actually works and you have a very dim future for this country and our economy.

Gary L. Rathbun is the president and CEO of Private Wealth Consultants Ltd. He can be heard at 4:06 p.m. every day on “After the Bell with Brian Wilson and the Afternoon Drive” and at 6 p.m. Wednesdays and Thursdays throughout Northern Ohio on “Eye on Your Money.” He can be reached at (419) 842-0334 or email him at garyrathbun@privatewealthconsultants.com.